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IMF Country Report No. 23/44

CABO VERDE

FIRST REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT—PRESS RELEASE; AND STAFF REPORT

January 2023

In the context of the First Review Under the Extended Credit Facility Arrangement, the following documents have been released and are included in this package:

• A Press Release.

• The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on Lapse of Time basis, following discussions that ended on November 11, 2022, with the officials of Cabo Verde on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on December 21, 2022.

The IMF's transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities' policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2023 International Monetary Fund

Press Release

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PR23/05

IMF Executive Board Completes First Review Under the Extended Credit Facility for Cabo Verde

FOR IMMEDIATE RELEASE

• The IMF Executive Board completed the first review under the 36-month Extended Credit Facility with Cabo Verde, providing the country with access to SDR 11.26 million (about US$15.19 million).

• The strong and broad-based recovery of the Cabo Verde economy continued in 2022. The economy has now recorded five consecutive quarters of positive growth, supported by a rebound in the tourism sector. This helped improve the fiscal position and place the debt- to-GDP ratio on a downward path. International reserves are adequate, and the financial sector remains resilient.

• It is important to continue efforts to preserve fiscal and debt sustainability and accelerate economic reforms while aiding the vulnerable and supporting the economic recovery.

Washington, DC – January 17, 2023: The Executive Board of the International Monetary Fund (IMF) completed the first review of Cabo Verde's performance under the 36-month Extended Credit Facility (ECF) that was approved on June 15, 2022. The completion of the review allows the authorities to draw the equivalent of SDR 11.26 million (47.50 percent of quota or about US$ 15.19 million), bringing total disbursement to SDR 22.52 million (95 percent of quota or about US$ 30.18 million). The Executive Board's decision was taken on a lapse-of-time basis.¹

The economic rebound is well entrenched, driven by the faster than expected recovery in the tourism sector. Real GDP growth is currently estimated at 10.5 percent in 2022 and is projected to moderate to 4.4 percent in 2023. Inflation remains relatively high (8.5 percent year-on-year at end October 2022), with rising global food and energy prices exerting upward pressure on the cost of food and fuel in Cabo Verde. In response, the authorities stepped up support to the vulnerable through well targeted subsidies on basic food items and electricity, which are expected to continue through the first half of 2023. Inflation is forecast to decline in 2023 but remain above its recent five-year historical average.

Economic growth also contributed to a reduction in the debt-to-GDP ratio and the authorities' decision to save the projected revenue overperformance in 2022 contributes to further advancing the program's fiscal consolidation and debt reduction objectives. The debt burden is estimated to have declined to 128.¹ percent of GDP by end-2022. The 2023 fiscal plan would result in a slightly improved primary fiscal balance compared to the program and includes prudent contingencies to safeguard against revenue shortfalls. Over the medium-term, fiscal consolidation will be aided by continued revenue mobilization and spending measures; the primary fiscal balance is expected to shift into surplus by 2026.

Program performance was strong. All end-June 2022 Performance Criteria (PCs) and Indicative Targets (ITs) were met. The Structural Benchmarks (SBs) for end-June 2022 and end-September 2022 were also met. All end-September 2022 ITs were met.

The economic outlook is positive but subject to risks, including from softening of economic prospects in key tourist markets, persistently elevated rates of inflation and its impact on the most vulnerable, resurgence of COVID-19 and lockdowns, and fiscal risks from SOEs. Climate-related shocks continue to present medium- and long-term risks.

The authorities are focused on preserving fiscal and debt sustainability, providing support to the vulnerable, and supporting the economic recovery. Over the medium-term, fiscal consolidation would be supported by advances in revenue mobilization particularly through the digitalization of services, and reforms to reduce fiscal risks from SOEs. Monetary and financial policy remains focused on protecting the peg and safeguarding financial sector stability. In addition, the authorities intend to accelerate implementation of climate-change mitigation and adaptation measures.

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CABO VERDE

FIRST REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT

December 21, 2022

EXECUTIVE SUMMARY

Context. The IMF Board approved a 36-month ECF arrangement for Cabo Verde in June 2022. The program aims to: strengthen public finances and put debt on a downward path; reduce fiscal risks from public enterprises and improve their financial management; modernize the monetary policy framework and improve resilience of the financial system; and raise the growth potential. Cabo Verde was hit hard by the COVID-19 pandemic. The recovery is now underway, and the economy has recorded five consecutive quarters of growth, supported by a rebound in tourism. The fiscal position has improved, the debt-to- GDP ratio is on a downward path, reserves are within the target range, and the financial sector remains resilient. However, spillovers from Russia's invasion of Ukraine have led to double-digit increases in energy and food prices.

Outlook and Risks. The rebound in growth from the COVID-19 induced recession is estimated to have continued through the second half of 2022 with annual growth estimated at 10.5 percent, however the rate of output expansion is forecast to moderate to 4.4 percent in 2023 due to the projected weakening of economic conditions in Cabo Verde's main tourism markets. The outlook is subject to risks including from further softening of economic prospects in key tourist markets, persistently elevated rates of inflation and its impact on the most vulnerable, resurgence of COVID-19 and lockdowns, and fiscal risk from SOEs. Climate-related shocks continue to present medium and long-term risks.

Program Performance. Program performance was strong. All the Performance Criteria (PCs) and an Indicative Target (IT) have been met at end-June. The Structural Benchmarks (SBs) for end-June 2022 and end-September 2022 have also been met. All the ITs for end- September 2022 were also met.

Policy Recommendations. The authorities are focused on preserving fiscal and debt sustainability, providing support to the vulnerable and supporting the economic recovery. Over the medium-term, fiscal consolidation would be supported by advances in revenue mobilization particularly through the digitalization of services and reforms to reduce risk from SOEs. Monetary and financial policy remains focused on protecting the peg and safeguarding financial sector stability.

Staff Views. Considering the authorities' strong program ownership and commitment to implementing the policies under the program as evidenced by strong program performance, staff recommends completion of the first ECF review. Completion of the review will release a disbursement equivalent to SDR 11.26 million.

Approved By

Costas Christou (AFR) and Johannes Wiegand (SPR)

Contents

• CONTEXT

• RECENT DEVELOPMENTS

• OUTLOOK AND RISKS

• PROGRAM PERFORMANCE

• PROGRAM POLICIES

• A. Strengthen Public Finances to Preserve Debt Sustainability

• B. Reduce Fiscal Risks from Public Enterprises and Improve Their Financial Management

• C. Modernize the Monetary Policy Framework and Improve Resilience of the Financial System

• D. Raise the Growth Potential and Increase Resilience to Shocks

• PROGRAM ISSUES AND RISKS

• STAFF APPRAISAL

• FIGURES

• 1. Recent Economic Developments

• 2. External Sector Developments

• 3. Fiscal Sector Developments

• 4. Monetary and Financial Sector Developments

• TABLES

• 1. Selected Economic Indicators, 2019–27

• 2. Balance of Payments, 2019–27

• 3a. Statement of Operations of the Central Government, 2019–27 (Millions of Cabo Verde Escudos)

• 3b. Statement of Operations of the Central Government, 2019–27 (Percent of GDP)

• 4. Monetary Survey, 2019–27

• 5. Financial Soundness Indicators of the Banking Sector, 2018–22Q3

• 6. Quantitative Performance Criteria and Indicative Targets Under the ECF, June 2022–December 2023

• 7. Structural Benchmarks Under the ECF for 2022-23

• 8. Indicators of Capacity to Repay the Fund, 2022-42

• 9. Schedule of Reviews Under the ECF, 2022-25

• ANNEXES

• I. Risk Assessment Matrix

• II. Public Enterprises Reforms: Progress and Next Steps

• III. Debt Decomposition and Capacity to Repay

• APPENDIX

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies for 2022–2025

  • Attachment II. Technical Memorandum of Understanding